What happens when cost is more important than marketing value?

This post is by Darren Woolley, Founder of TrinityP3. With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.

At the recent WFA Global Marketing Week in Brussels I was interviewed on the impact cost reduction was having on innovation and creativity. Seeing the edited result here got me thinking about the impact I have seen in recent years where cost reduction became more important than the results and value marketing and their agencies were delivering.

From the first day of setting up TrinityP3 we have not accepted payment linked to savings because the easiest thing in the world is to reduce advertising and marketing costs at the expense of effectiveness and value.

“Cutting costs without improvements in quality is futile.”

—W. Edwards Deming (1900–1996)

The three examples that immediately come to mind are:

Media cost over media value

Reduction of agency fees at the expense of expertise

A focus on price leading to increased cost

These are actual examples and to protect the guilty, the naive and the stupid I have changed or eliminated the details that would identify who they are, but I am sure they will see themselves in these examples.

Media cost over media value

A global consumer goods company CMO was talking to me about the performance of his media agency and wondering what I thought of them because he had doubts on their level of innovation and proactivity. The agency had a good reputation with their many other clients and within the marketplace so I was surprised he was having such a negative experience.

I asked about how the agency were remunerated and he told me that on the global agreement they had the typical small margin deal but that the bonus was quite substantial based on delivering very aggressive CPM (Cost Per Thousand) goals.

Typical of many global, and sometimes local, media agency deals is a focus on providing a bonus to the media agency based on achieving lower media costs and one of the easiest measures of media cost is CPM. The problem is that a media agency can achieve low CPMs by buying low quality inventory and avoiding the high quality, premium media environments that attract a premium price and therefore drive up the CPM.

I asked the CMO to describe the symptoms he saw as reflecting the agencies poor performance and he said that for their significant media investment he almost never saw his spots on air yet he always saw his competitors spots. And that the agency rarely came forward with innovative sponsorship or media properties.

We talked about when he watched television and this was when he got home from the office around 7.30 pm. This is zone 1 and premium time with premium viewers and rates. There is no way the agency could schedule in this time without compromising their bonus. But clearly the competitors did not have the same limitations.

Likewise, many of the exciting and interesting sponsorship deals are for premium properties and these invariably come with premium audience delivery costs. Even though they can provide excellent value in positioning, awareness and brand association, the measure of cost of audience delivery, CPM, does not take any of this into account.

Here is a prime example of where measuring cost and providing an incentive to lower cost has eliminated the opportunities to embrace the media value, leaving the brand in the bargain basement.

Reduction of agency fees at the expense of expertise

A global entertainment company contacted me to discuss undertaking a media agency pitch. It was felt that the agency had been under-performing for the past 12 months or more with little or no obvious strategic input and a high turnover of staff on the account.

Both of these are obvious symptoms of potential remuneration issues and so I suggested to the marketers we undertake a remuneration benchmarking prior to the pitch to get a baseline of the level of remuneration. Sure enough for the level of spend the mix and complexity of the media requirements the agency were paid about 35% less than benchmark.

Interestingly, on bringing these findings to the attention of the marketing team, we were informed that 18 months earlier the regional procurement team had benchmarked and reduced the agency fee by 30%. The agency accepted the reduction in the fee as the alternative was to have to defend the business in a pitch.

Instead, the agency took the 30% reduction in fee and effectively removed the senior account management and media strategy and planning from the account replacing them with the resources they could afford. They did not touch the buying / trading function as this is the area that was regularly checked by media buying audit.

On the basis that the average media agency fee is between 2.5% and 4% of media spend, they had effectively saved 30% off the agency fee and effectively put the 96% – 97.5% of the media spend at risk of underperformance. The problem is that they did not know this for 18 months as the only thing they were measuring was media buying cost and not the media value delivered.

A focus on price leading to increased cost

A financial services company had appointed an agency and commissioned us to assist with the negotiation and benchmarking of the proposed agency fees. A year later the contract was being reviewed by the company procurement team and I received a call from the procurement lead.

He was reviewing the production rate card and was questioning the rates we had negotiated. In his experience in the print industry he was aware of studio rates that were less than half of the rate we had negotiated. In the conversation I pointed out that the advertising agencies were typically more expensive than the production houses associated with print companies and brokers. The reason is that the agency is developing the creative work and that typically they utilise a better calibre of studio artist / designer.

He disagreed and went off to negotiate with the agency, convinced that our benchmarks were out-of-step with this objective of reducing agency costs. He came back several weeks later gloating about his results, especially on studio costs. The rate had been negotiated from $180 per hour to just $90 per hour. He had calculated that on the previous year’s artwork spend he had effectively saved the company more than a million dollars.

It was an impressive price reduction and I asked him to share the whole rate card. On this there was a ‘new’ charge being file archiving and file retrieval. Anyone aware of the Apple Mac OS and Adobe In-Design application know that this is effectively Command O and Command S. Yet here was a charge of $90 each.

Most of the jobs going through the agency studio for this client, and something we knew but he did not, are simple changes and corrections. These are typically billed in 30 minute increments. Because of the many stakeholders and the volume of work these changes outnumber the longer, base artwork costs by more than 5 to 1. So what is the cost implication?

Under the old system the price was $180 per hour. Five in one jobs are billed at 30 minutes which is a cost of $90 each. Under the new prices in the rate card those same jobs are now $45 for the studio time plus $90 for the file retrieval plus $90 for the file archiving being a total cost of $225. Reducing the hourly rate by 50% effectively raised the cost 150% in more than 80% of studio projects.

Even worse, it appears that the number of times jobs jobs were sent back through the studio for revision increased because the lower rate created the perception that the cost consequences were also reduced. He did not save the company more than a million dollars, he effectively cost the company money because the focus was on the price and not the cost or the value to the company.

Are you focused on Cost? Price? Or Value?

Here are three examples that come to mind when people are focused on price or cost and not value. Marketing is a value proposition. But so much of the conversation is based on cost and price. The results of this are often counter to the true objective to be more efficient and cost effective.

Do you have any examples of where cost reduction has been applied at the expense of value in marketing? You do not have to provide details, just share the basic premise as I have done. Leave a comment and share.

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About Darren Woolley

Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com

One Response to What happens when cost is more important than marketing value?

From a purely PROCUREMENT point of view, the question too often is … how do you get COST on the marketing agenda at all?
Hitherto, the successful defence of the CMO to the advances of Procurement as a discipline has been based around the great VALUE of the mysterious art of marketing; which should be unfettered by grubby cost battles of course.
And when COST is belatedly on the Marketing agenda, it seems more about stretching marketing BUDGETS than generating real cost savings.
Marketing needs to demonstrate VFM same as everyone else throughout the organisation: How long can business afford to indulge offending CMOs?

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